Volatility Markets Underreacted to the Early Stages of the COVID-19 Pandemic
Review of Asset Pricing Studies, Forthcoming
51 Pages Posted: 22 Apr 2020 Last revised: 3 Aug 2020
Date Written: July 21, 2020
VIX futures prices rose slowly in late February and early March 2020 as the COVID-19 pandemic took hold. Futures price premiums, defined as futures prices minus real-time statistical forecasts of future VIX values, turned sharply negative and remained negative until mid-April. Trading strategies based on estimated premiums profited from the subsequent increase in market volatility and equity market crash. The underreaction of futures prices to growing pandemic risks poses a puzzle for standard asset pricing models.
Keywords: VIX futures, COVID-19, Variance risk premium
JEL Classification: G13, G40, G11
Suggested Citation: Suggested Citation